Bumper German surplus bolsters Merkel

Posted on August 24, 2016

Angela Merkel on a trip to Sanofi pharmaceuticals earlier this year©Getty

Angela Merkel on a trip to Sanofi pharmaceuticals earlier this year

Germany recorded a better than expected budget surplus of €18.5bn in the first half of 2016, giving chancellor Angela Merkel’s government financial room to manoeuvre ahead of parliamentary elections next year.

The surplus — which amounts to 1.2 per cent of gross domestic product — contrasts with the deficits that burden countries such as France and Italy.

    Its sheer size could provoke renewed pressure from such eurozone partners and from the US for Germany to spend more, especially on public infrastructure, to stimulate the regional economy.

    Many politicians in less robust economies than Germany’s have blamed the eurozone’s relatively lacklustre performance on Berlin’s fiscal conservatism — which also included urging fiscal austerity on its neighbours. The IMF has also pushed Berlin to relax its stance.

    But the surplus also gives Ms Merkel and Wolfgang Schäuble, her powerful finance minister, the chance to emphasise their ruling CDU’s fiscal record ahead of widely watched elections next month in two regions, Berlin and rural Mecklenburg-Vorpommern.

    It was achieved despite spending increases to cover the costs of over 1m refugees who have arrived since early last year, and puts Berlin on course to exceed last year’s €30bn annual surplus and to record the third annual surplus in succession.

    Higher than expected tax receipts from both employment and consumption meant the figures were far better than the government’s conservative assumption of a minimal surplus.

    “The budgets of central government, state government, local government and social security funds continued to benefit from both a positive development of employment and economy and moderate spending policies,” said the government statistics office, which announced the data.

    But, confirming preliminary data published earlier this month, the statistics office said economic growth slowed in the second quarter to 0.4 per cent, compared with 0.7 per cent in the preceding three months.

    Chart: German budget

    The UK’s June 23 vote to leave the EU came too late to have any impact on the figures but, according to a business survey published earlier this week, may not hit confidence very hard in the second half either.

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    Christian Lindner, leader of the liberal FDP party, which has long campaigned for tax cuts, seized on the surplus to urge the government to make reductions. “Now is the time for action” so that taxpayers would see some gains in the next financial year, starting January 1, he said.

    Mr Schäuble has not ruled out some relief for taxpayers, for example in lifting tax thresholds so that tax revenue increases automatically generated by rising wages are reduced.

    However, the hawkish finance minister is sensitive to competing demands for spending increases, notably on pensions, coming from both the conservative CDU and the centre-left social democrats.

    If the government did decide to relax the purse strings, it would almost certainly strike a balance between spending increases and tax cuts in any budget package launched before next year’s parliamentary election. But Mr Schäuble will be reluctant to do anything which might damage his iron budget-management reputation.

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